India gold policies prove robbing Peter to pay Paul

The Indian government seems to be hell-bent on resolving its Current Account Deficit (CAD) and is doing so by seemingly waging war on gold.

What is also clear is that the draconian regulations placed upon bullion traders, the raising of duties and taxes and the pressure put on gold traders by placing them under investigation demonstrates just how serious the Finance Ministry are in reducing gold imports and therefore correcting the deficit.

You might be forgiven for thinking that gold is viewed as single-handedly responsible for the economic failure of India, rather than poor policy decisions that are resulting in weak economic output and high inflation. In short, it begs the question whether gold is being held as the scapegoat. It does also beg the question about the massive reduction in the value of gold held by rural Indians as a result of this campaign.

In short, how does the size of the CAD compare to the reduction in value of gold held by Indians as a result of the negative sentiment it has generated in the global bullion market? Best estimates only are possible.

Well, Indians privately own an estimated 18,000 tonnes of gold, plus 557 tonnes of official holdings held by the Reserve Bank of India.

The campaign against gold can be traced to mid-January 2013 when the import duty on dore bars/ores was raised from 2% to 5% and duty on market bars raised from 4% to 6%. Back then gold was trading at $1,692 and has since fallen to $1,200 — a decline of 29%. That would suggest that India's privately and publicly held gold has fallen from $1,010 billion to $716 billion — a decline of $294 billion.

The difficult bit now is to estimate how much of the 29% fall in gold prices can be attributed to the world’s largest gold market shuttering imports. Well we plump for about one third, so Indians are about $100 billion poorer as a result of this policy. And the size of the CAD ? Well it’s currently running at $20 billion a quarter — in other words a deficit of $80 billion per annum. A case of robbing Peter to pay Paul.

Meanwhile rural Indians are left with the uncomfortable feeling that the government wants them out of gold and into either the (falling) rupee or perhaps the stock market. If there was ever a time to own, it is when the government tells you otherwise. As a PR exercise, this rivals Gordon Brown's selling off more than half of the U.K.’s gold reserves — now there's a U.K. to India export that London might relish. Any jobs going at the RBI?